Angel & Venture Capital Finance: Where is the Money Moving?


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"Angel & Venture Capital Finance: Where is the Money Moving?" presented by James Geshwiler (Managing Director of CommonAngels) at December 2008 Web Innovators Group

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  • Hi James, Your slides on the important risks to entrepreneurs and the economic turmoil's impact on those is great. I'm raising money now and keep reminding myself that everyone that says it's impossible to raise money from angels/vc now forget it's never been easy. Now they just have an excuse instead of pointing to considering the problem might be their crappy business idea.
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Angel & Venture Capital Finance: Where is the Money Moving?

  1. Angel & Venture Capital Finance: Where is the Money Moving? James Geshwiler Managing Director, CommonAngels Web Innovators Group 9 December 2008
  2. Where’s the Money?! <ul><li>Public Market Crash Hits Everybody </li></ul><ul><ul><li>“Venture Capital Hits a Cash-Call Crunch,” WSJ , 12/8 </li></ul></ul><ul><ul><li>“High-tech Wrestles with credit crisis,” Boston Globe 10/8 </li></ul></ul><ul><ul><li>“A lot of [VCs] could be on the sidelines for four or five years.&quot; –Boston-based general partner </li></ul></ul><ul><ul><li>Most angels net worth down 30-50% </li></ul></ul>
  3. Risk Isn’t Up that Much; Just Changed <ul><li>Financial risk—very high </li></ul><ul><ul><li>Can’t count on follow-on investment </li></ul></ul><ul><ul><li>Syndication gone from tough to nearly impossible </li></ul></ul><ul><li>Competitive Risk—way down! </li></ul><ul><ul><li>Little threat from existing companies </li></ul></ul><ul><ul><li>Fewer VC-backed chasers </li></ul></ul><ul><li>Market Risk—mixed, depends on sector, company </li></ul><ul><li>People Risk—down; great teams, attrition down </li></ul><ul><li>Product Risk—unchanged </li></ul>
  4. Working with Investors Today <ul><li>Target Investors who Succeed on Lower M&A </li></ul><ul><ul><li>High M&A, IPO closed for big exits </li></ul></ul><ul><ul><li>Very hard to move the needle on a big fund </li></ul></ul><ul><li>Shouldn’t be Focused on Today’s Market </li></ul><ul><ul><li>Companies backed today targeting 5-7 years for exit </li></ul></ul><ul><li>Cash is King of Kings </li></ul><ul><ul><li>Cash-flow break even on 1 round if at all possible </li></ul></ul>
  5. Working with Angels, VCs, Both? <ul><li>Individual “Angel” or “Private” Investor </li></ul><ul><ul><li>Invests own money, gets full return </li></ul></ul><ul><ul><li>Typically industry veterans </li></ul></ul><ul><li>Venture Capitalists </li></ul><ul><ul><li>Compensated on fees, profit share </li></ul></ul><ul><ul><li>Dedicated, institutional investor </li></ul></ul><ul><li>Angel Groups </li></ul><ul><ul><li>Large networks of industry experts </li></ul></ul><ul><ul><li>Usually 2-3 with greatest skills lead + “bench” </li></ul></ul><ul><ul><li>Organized, institutional structure </li></ul></ul>
  6. Who are the Top Investors? Source: MIT Entrepreneurship Center & HBS Study on Angel Investing, Feb 2000 Founder, Chairman Former CEO Successful company in your or complementary sector Professional Entrepreneur Angel Financial Return Angel Low Guardian Angels Operational expertise angel High Industry Experience High Low Entrepreneurial Experience
  7. Angel Groups Addressing Void Left by VC Stage Pre-Seed Seed/Start-Up     Funding Gap between $500,000 and $5,000,000, targeting average M&A and up Early Later Source Founders, Friends and Family   Individual Angels     Venture Funds Investment   $25,000 to $100,000 $100,000 to $500,000 $5,000,000 and up (initial capital may be smaller, but exit targets higher)
  8. Median Fund Remains ~$200M! Source: DowJones/VentureOne Median VC Fund Size (for funds greater than $20M)
  9. Funds < $100M Disappearing Allocation of Fund Size by Number of Funds Raised per Vintage Year Source: DowJones/VentureOne
  10. Angels Institutionalizing <ul><li>ACA Formed 2004 </li></ul><ul><ul><li>46 Groups Charter Members </li></ul></ul><ul><li>As of 2008: </li></ul><ul><ul><li>142 Groups </li></ul></ul><ul><ul><li>18 Affiliate Organizations </li></ul></ul><ul><ul><li>>6,500 Investors </li></ul></ul><ul><ul><li>43 States & Provinces </li></ul></ul>Member Locations Full Member Provisional Member
  11. CommonAngels Target Investments <ul><li>Series A Financing of $500K - $5M </li></ul><ul><li>Total Capital Less than $20M </li></ul><ul><li>New Areas of Information Technology </li></ul><ul><li>Current Expertise within the Membership </li></ul><ul><li>Passionate with CEO Capabilities </li></ul><ul><li>Within the Geographic Area – 1 Hour Travel </li></ul><ul><li>Possibility of Liquidity Event in 5 years </li></ul>
  12. Typical Deal Process Submissions (~30 Plans Per Month) Managing Director pre-screens emailed submissions. Screening Team Review (5 – 10 Plans Per Month) Screening team votes on which companies to invite to general meeting. General Meeting Presentations (1 – 3 Plans Per Month) Managing Director polls members for level of investment interest in deals, recruits diligence team, and facilitates selection of deal lead to begin term sheet negotiations. Manage Investment Board member represents member interests and seeks an attractive exit. Deal lead closes transaction and the sidecar fund invests in companies that attract at least $250K in investment from at least 5 members. Diligence & Term Sheet Negotiations (Coordinated by Managing Director & Deal Lead) ENTER EXIT
  13. Who Matters More than What <ul><li>“ The most important item on a term sheet is the name of the investor at the top” —Mark Gorenberg, Hummer Winblad Venture Partners </li></ul><ul><li>View Investors like any other Strategic Relationship </li></ul><ul><ul><li>Cash is a commodity, firms and people aren’t </li></ul></ul><ul><ul><li>Long-term partners </li></ul></ul><ul><ul><li>Influence of style, expertise </li></ul></ul><ul><li>Big Investor vs. Small Investor Incentives </li></ul><ul><li>“ Instant Company” vs. Organic Approach </li></ul><ul><li>1 st round dilution matters much less than later rounds </li></ul>
  14. Big Investor Incentives <ul><li>>$250M in Fund </li></ul><ul><ul><li>>$40M/Partner </li></ul></ul><ul><ul><li>>$10M/Investment </li></ul></ul><ul><ul><li>>$50M Liquidity/Deal, Exits >$500M </li></ul></ul><ul><li>Institutional LPs </li></ul><ul><ul><li>Meticulously measure IRR </li></ul></ul><ul><ul><li>Next fund depends on top quartile performance </li></ul></ul><ul><li>From Company’s Perspective </li></ul><ul><ul><li>Pro/con: 800lb Gorilla as your friend </li></ul></ul><ul><ul><li>Technical risk OK ($ can fix that); Can’t Bring Market Risk (exit too small) </li></ul></ul><ul><ul><li>Return needs to justify $30-40M+ from syndication, multiple rounds </li></ul></ul><ul><ul><li>“ We Fund BIG Ideas….” </li></ul></ul>
  15. Small Investor Incentives <ul><li><$100M in Fund/Network </li></ul><ul><ul><li>$10M/Partner or less </li></ul></ul><ul><ul><li>$500K-$3M Investment </li></ul></ul><ul><ul><li>$5M-20M Liquidity/Deal, Exits $50M-100M </li></ul></ul><ul><li>Institutional LPs, SBIC, Individuals </li></ul><ul><ul><li>Maybe more flexibility in performance (non-ERISA $) </li></ul></ul><ul><ul><li>Maybe less, eg., SBIC program…. </li></ul></ul><ul><li>From Company’s Perspective </li></ul><ul><ul><li>Pro/con: good returns on average M&A transaction </li></ul></ul><ul><ul><li>Market risk OK; technical risk bad (can be bottomless pit) </li></ul></ul><ul><ul><li>Shallower pockets may be disincentive to pile on risk </li></ul></ul><ul><ul><li>“ Who is going to buy you?...” </li></ul></ul>
  16. Big vs Small Investor Incentives $ Exit Probability Big Investor (>$500M) : Has capital, incentive to push for big outcome, but can drive failure seeking bigger exit Small Investor (<$200M) : Has capital to avoid failure, incentive to sell earlier for similar IRR Courtesy Dharmesh Shah, founder Hubspot
  17. Textbook Case Studies of Incentives SOFTWARE (Web 2.0) Medical Devices (Orthopedics, Non-invasive) Likely Clash: Small return for opportunity cost, incentives to dream big, assume more risk Low Likely Clash: Run out of money, cramdown, premature sale BIOTECH (drug discovery) CLASSIC TELECOM (routers, CLECs) High Company Capital Requirements Small Large Fund Size
  18. “Instant Company” vs. Organic Approach <ul><li>Timelines, Competition Also Key Variables </li></ul><ul><li>Some Opportunities Require Big Money Up Front </li></ul><ul><ul><li>Taking on public company </li></ul></ul><ul><ul><li>Making a market </li></ul></ul><ul><ul><li>Need critical mass for audience </li></ul></ul><ul><ul><li>Large capital requirement to finish R&D, prove concept, build infrastructure </li></ul></ul><ul><ul><li>Analogy: launching a rocket…you get there fast! But aim correctly! </li></ul></ul><ul><li>Others Are Better Done in Stages </li></ul><ul><ul><li>Greenfield opportunity with barriers to entry </li></ul></ul><ul><ul><li>Multiple market opportunities that need exploration </li></ul></ul><ul><ul><li>Multiple exit opportunities, friendly acquirers </li></ul></ul><ul><ul><li>Analogy: flying an airplane….slower than a rocket, easier to change course </li></ul></ul>
  19. Example Investment: Carbonite <ul><li>Long-time friends of CEO </li></ul><ul><li>All-star team, 5 th company </li></ul><ul><li>Operational breakthrough on consumer backup </li></ul><ul><li>Rapid initial adoption </li></ul><ul><li>$2.6M 1 st Round, Oct ‘05 </li></ul><ul><li>$3.5M 2 nd Round, Aug ’06 </li></ul><ul><li>$15M 3 rd Round, Apr ‘07 </li></ul>
  20. Case Study: <ul><li>Sloan MBA & Co-Founder </li></ul><ul><li>First-time CEO </li></ul><ul><li>Closely ties to market </li></ul><ul><li>Rapid initial adoption </li></ul><ul><li>$1.1M 1 st Round, All Angels, June ‘06 </li></ul><ul><li>$6.0M 2 nd Round, 2 VCs + Angels, June ’07 </li></ul>